31 August 2020

Landmark decision affirms jurisdiction of English courts to determine FRAND terms

This article was written by Kim O’Connell, Luke Hawthorne, Sarah-Jane Frydman. 

In a watershed decision with significant implications for the technology and telecommunications industries – and the patent community more broadly – the Supreme Court of the United Kingdom has delivered its long-awaited decision in three cases, Unwired Planet International Ltd v Huawei Technologies (UK) Co Ltd; Huawei Technologies (UK) Co Ltd v Conversant Wireless Licensing SÀRL and ZTE Corporation v Conversant Wireless Licensing SÀRL.  The Court has unanimously upheld lower court decisions, confirming that English courts are able to grant injunctions to restrain infringement of UK standard essential patents (SEP) and have the jurisdiction to determine fair, reasonable and non-discriminatory (FRAND) terms for worldwide SEP licences. 

The decision confirms that an implementer who refuses to take a licence on terms found by the court to be FRAND has in effect chosen to have no licence, and so may be subject to an injunction in the UK.  It brings much needed certainty to how courts will approach and determine FRAND licensing issues, despite the fact that infringement and validity issues may still need to be determined on a national basis.

While a FRAND dispute has yet to be judicially determined in Australia, it is likely that an Australian Court will find the approach taken in English law to be highly persuasive.

Background

Unwired Planet is a US company that owns a global patent portfolio but has no intention of developing the technology the subject of its patents – known as a “non-practising entity”, “patent licensing company” (or, in some circles, a “patent troll”).  Numerous of this entity’s patents, most of which it acquired from Ericsson and other tech companies, have been declared “essential” to various telecommunications industry standards, meaning the patented invention must be used in order to comply with the relevant standard.  SEP holders are required to make a commitment to licence their SEPs on FRAND terms when their patented inventions are incorporated into a standard.

In 2014, Unwired Planet brought proceedings against Chinese mobile phone and infrastructure manufacturer Huawei, together with Google and Samsung, alleging the infringement of six of its patents.  Five of those patents had been declared by the European Telecommunications Standards Institute (ETSI) to be SEPs and were therefore required, under the ETSI IPR Policy, to be licensed on FRAND terms.  Despite the progression of licence negotiations in each case, the patent owners and implementers had been unable to agree to licences, with the implementers in each case arguing that the offers were not FRAND.  The implementers denied infringement and essentiality and argued that the patents were invalid.  Google settled in relation to the SEPs in 2015 and Samsung followed in 2016, leaving Huawei as the sole defendant.

Following a number of “technical trials”, the UK High Court held that only two of Unwired Planet’s SEPs were essential to the 2G, 3G and 4G standards and had been infringed by Huawei. The 7-week “non-technical trial” on FRAND issues followed.  The main issue in dispute was whether, and to what extent, the terms of the offers made by either side were FRAND.  At the heart of this dispute was the proper scope of any licence and the value of Unwired Planet’s patents, which would be reflected in the royalty rate.

Mr Justice Birss of the UK High Court found that questions as to the enforcement of FRAND undertakings and the determination of FRAND rates and licence terms were within the Court’s jurisdiction and considered that neither party had made a FRAND offer.  In coming to that conclusion, for the first time a formula was laid down for the setting of FRAND royalties for SEP licences.  He held that if Huawei were not prepared to take a licence on those terms, an injunction to restrain infringement of UK patents should be granted.  Mr Justice Birss’ decision was upheld by the Court of Appeal in October 2018.

In 2017, a separate case was brought by Conversant (which purchased around 2,000 patents from Nokia) against both Huawei and ZTE, another Chinese company.  As in the Unwired Planet litigation, Mr Justice Carr ruled in favour of the patent owner in April 2018 in a decision that was affirmed on appeal in January 2019.  On appeal Conversant sought to argue that the UK Court was not the correct form for the FRAND terms dispute.

The Supreme Court’s Decision

The Supreme Court unanimously dismissed Huawei’s and ZTE’s appeals.  The most significant point in issue was largely the same as it had been in the lower courts – namely, whether the determination of FRAND rates was within the Court’s jurisdiction. 

Do English courts have jurisdiction to set a global FRAND rate and grant an injunction restraining infringement of an SEP patent?

Yes, on both questions.  In the Court’s view, the fact that English courts have jurisdiction follows from the context that gives rise to FRAND licensing, in which telecommunications operators may hold portfolios of hundreds or thousands of patents relevant to a standard – meaning there is necessarily some uncertainty for both patent holders and implementers as to the validity or infringement of each individual patent.  The Court found that the jurisdiction of English courts to determine a FRAND licence stems from the contractual arrangement which ETSI created in its IPR Policy.

Huawei argued that English Courts did not have jurisdiction to determine the terms of a licence of foreign patents where infringement and validity may be in dispute.  The Court noted that the lower Court did not purport to determine issues of infringement or validity of foreign patents.  If an implementer is concerned about particular foreign patents, it could seek to reserve its rights in relation to those matters and to require that royalties be reduced if it were to successfully bring a challenge in that other jurisdiction.

The Court also rejected Huawei’s construction of ETSI’s IPR Policy as prohibiting an SEP owner from seeking an injunction from a national court where it establishes that an implementer is infringing its patent.  On the contrary, the Court found that the IPR Policy encourages parties to reach agreement on the terms of a licence and avoid litigation and recognises that if there are disputes about the validity or infringement of patents, the parties must resolve them by invoking the jurisdiction of a national court or by arbitration.  The possibility of the grant of an injunction by a national court is a necessary component of the balance which the IPR Policy seeks to strike, and ensures implementers have a strong incentive to negotiate and accept FRAND terms for use of SEP portfolios. 

The Court held that damages would not be an adequate remedy, as SEP owners would then need to litigate patent by patent and country by country to recover compensation for use of its patent rights.

What is ‘non-discrimination’ in FRAND?

The Court found that there was no obligation on Unwired Planet to offer Huawei the same royalty rates which had been offered to Samsung when Samsung settled back in 2016 in order to satisfy the non-discrimination limb of FRAND.  The Court agreed with Birss J (and the Court of Appeal) that FRAND is a unitary concept and that the non-discrimination element is to operate together with the fair and reasonable limb.  The Court also acknowledged the commercial reality that SEP holders may offer below-FRAND rates to implementers who wanted to take a ‘first mover’ advantage.

Other issues

The Court’s other findings, while not as significant, will still provide some guidance for the determination of FRAND issues in future. 

The issue of forum non conveniens arose in the Conversant case, where it was argued that, even if English courts had jurisdiction, the Chinese courts are a more appropriate forum in light of the patents in the portfolio and volume of sales in China.  The Court did not determine the issue, finding that, in any event, Chinese courts currently do not have jurisdiction to determine the terms of a global FRAND licence in the absence of agreement by all parties. 

The Court also found that, in the FRAND context, an injunction is likely to be a more effective remedy than damages, as a monetary award would not prohibit infringement altogether (and that suing for infringement in each jurisdiction in which SEPs are used is impractical).  An injunction on the other hand would essentially compel the infringer to accept a licence on terms the Court determined to be FRAND.

An argument from Huawei that Unwired Planet abused its dominant position by commencing the proceedings rather than first making a FRAND licence offer, contrary to European competition law, was rejected.  Although the Court concluded that Unwired Planet was in breach of competition law requirements, the Court considered that as Unwired Planet made it clear that it was willing to offer a licence on whatever terms the Court decided were FRAND, it had not behaved abusively.

Australian implications

Technology providers in Australia leverage global SEP licences to enable them to utilise Australian SEPs.  Broadly, there are implications for an SEP owner who seeks to leverage SEPs in an anti-competitive way, if contrary to the Competition and Consumer Act 2010 (Cth).  The recent repeal of the intellectual property exemption under s 51(3) of that legislation has the effect that conduct involving intellectual property rights, including SEPs, is now subject to the anti-competitive conduct provisions in the same manner as other conduct.

The Federal Court is on the cusp of directly considering SEPs for the first time, with the patent infringement dispute between Motorola and Hytera having progressed to trial in July 2019.  Central to Hytera’s defence is its argument that two of Motorola’s patents are essential to particular ETSI digital mobile radio standards, in that compliance with the standards cannot be achieved without infringing Motorola’s patents.  This is despite the fact that the patents in suit are not currently identified as SEPs by the relevant standards (noting, however, that ETSI relies on patent owners self-nominating when they consider they are the holder of an SEP, on condition they commit to offering licences on FRAND terms).  As at the date of this alert, a second tranche of the hearing, involving allegations that Hytera breached copyright in Motorola’s source code, is underway. 

If the dispute reaches judgment, the UK Supreme Court’s approach in the cases discussed above is likely to be highly influential to the Federal Court in its consideration of how to approach SEPs and the question of appropriate remedies if disputed Australian patents are found in fact to be essential to relevant standards.

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